Cash Management Tips for Your Small Business

Small Business

As a small business owner, you need to manage your cash flow. Any owner should understand how cash moves in and out of their business. Being aware of cash flow can help your daily operations. All companies need to have a plan that focuses on cash management. Here are a few tips to help with these tasks.

Prioritize Your Bills

When you receive an invoice, you may want to pay it right away. However, that is not always the best course of action. You should extend your payable for as long as possible so that you can spread out your payment. It is not a good idea to pay all bills at the same time. It could drain your business’s cash, which can strain your supplier and employee relationships, especially if you cannot pay on time.

Instead of paying immediately, you need to review your bills and sort them according to priority. By staggering payment days, you can take care of the most important bills first, such as payroll and rent. After that, focus on the bills that are less important and have more flexible payment dates. In some cases, you can get a discount for paying a bill before the due date. With that, you should prioritize those bills to help save some money.

Be careful with this tip. You always want to pay on time. Late payments can affect your credit and require you to pay late fees.

Select the Right Payment Cycle

When you need to pay your employees, schedule the payroll to match your revenue streams. Some businesses, like retail stores and restaurants, generate revenue on a daily basis. They can cover those costs for the weekly payroll. However, for companies with a slow revenue stream, it can be a challenge to meet payroll obligations. Some businesses will adjust their payroll cycle to a biweekly or monthly schedule. Make sure to follow all applicable state laws regarding wages. Some states may have requirements that businesses must follow for payroll frequency.

Negotiate Supplier Payments

In many cases, you can negotiate with a supplier regarding payments. If you have a great relationship with a supplier, they are more likely to work with you. Think about flexible payment options to manage your cash. Many suppliers will offer special payment terms, especially if you order regularly or in bulk. With a payment agreement with your supplier, you can get more time to settle those invoices.

Collect Receivables Quickly

When you need to manage your money, you should look at your cash flow. You can improve that flow by collecting receivables on a timely basis. There are a few ways to expedite the process of collecting receivables. First, request a deposit from customers when taking an order or project. You could also offer discounts for customers who pay quickly. Also, you may want to move outdated inventory with discounted prices. Finally, use online invoices that offer more payment options for your customers.

Manage Your Credit Policies

When you offer any credit to your customers, you must establish a few credit policies to manage your cash. For example, you will want to take a look at your invoicing. It is crucial to quickly send out the invoices and follow up with customers for payments. Before you extend any credit, make sure to require a credit check for all new customers. Those customers who pay late can hurt your available cash. You will want to identify those late payers and develop a cash-on-delivery policy for those who don’t pay on time.

Use a Business Credit Card

Many people might not want to open a new credit card. However, a business credit card can free up your cash to pay everyday expenses. When choosing a business credit card, you should find one with a rewards program. In some cases, you can reduce your costs and get a percentage back on a few purchases.

Track All Expenses

You must keep track of all your business expenses. Make sure to check your monthly statements. If you need help with this task, small business accounting services can help you keep track of your expenses and cash flow.

Open a Line of Credit

If you want to maintain a balanced cash flow cycle, consider opening up a line of credit to get quick access to cash. Many businesses have a line of credit to bridge any gaps between their receivables and payables. Also, a line of credit can help cover unexpected expenses, buy equipment, and help with growth opportunities.

Use the Latest Technology To Accept Payments

When you want to accept receivables quickly, consider using online payment methods to collect those bills. Along with that, the latest technology can help you track the payments of every customer.

Manage Your Business’s Cash

When you can monitor your cash flow, it can help with your business’s short- and long-term success. By collecting payments quickly, monitoring expenses, and negotiating with suppliers, you will have a few options to manage the cash flow in your business. If you want someone to handle these vital responsibilities, make sure to find an accountant for your business.

Find an Accountant for My Small Business

TMD Accounting has been serving the Gloucester County community for over 40 years. Our accounting firm is a family-owned and -operated business. We are an affordable, reliable, and flexible way to help manage your company’s financial health. Schedule your consultation by calling 856-228-2205.

Your Small Business Tax Preparation Checklist

Small Business, Tax Planning

Small business owners should ideally prepare for tax filing season year-round. Planning can help to simplify the tax filing process and help small business owners to take advantage of potential deductions and credits for which they might qualify. As the tax season draws near, it is important to ensure you understand the various deadlines that apply and the documents you should gather. At TMD Accounting, part of our small business accounting services includes helping our clients prepare and file their business tax returns. Here’s a checklist that can help you get a jump on the upcoming tax season.

1. Know the Forms You Will File

The tax form your business will file depends on the legal entity structure you have chosen as follows:

  • Sole proprietorship – Schedule C with your individual Form 1040
  • Limited liability company (LLC) with one member- Schedule C filed with your individual Form 1040
  • LLC with more than one member – Form 1065
  • Partnership – Form 1065
  • S-corporation – Form 1120-S
  • C-corporation – Form 1120

Additional schedules and forms might also need to be attached based on the credits and deductions you claim and the types of income you need to report.

2. Information to Gather

Before it is time to file, you should gather the following information to make the process easier:

  • Employer identification number (EIN) or Social Security number
  • Business’s legal name
  • Business address
  • Business principal activity code from the chart in the instructions for
  • Schedule C
  • Income information from your business, including from sales, property sales, collected rent, dividends, interest, canceled debt, allowances, returns, and other income
  • Cost of goods sold for a deduction if your business sells products with a beginning and ending inventory by using the worksheet in IRS Publication 334, Chapter 6 to calculate it
  • Business expenses, including utilities, advertising, vehicle expenses, mileage, fees and commissions, contractor labor, depreciation, insurance, employee benefits, professional fees, legal fees, office expenses, employee wages, license, taxes, and others
  • Information broken down by location if you have locations in several states

Gathering this information can be simple if you use small business accounting software. If you haven’t kept good records, you might need to recreate them by using your bank statements, credit card statements, receipts, and other types of documentation.

3. Issue 1099s if Necessary

If you hired independent contractors or freelancers and paid them $600 or more during the tax year, you need to issue Form 1099-MISC to each one. This is a form used to report payments for work performed by non-employees and independent contractors. You aren’t required to issue a Form 1099-MISC if you paid a contractor through a third-party payment network such as PayPal. In that case, the payments will be reported by the payment processor on Form 1099-K. You can either print Form 1099-MISC through your accounting software or purchase blank forms from a local office supply store. Your accounting firm can also supply these forms for your business.

4. Know Your Other Small Business Tax Obligations

Small businesses also need to be aware of their other tax obligations and returns beyond the federal income tax, including the following:

  • Employment tax withholdings – Must be filed with the IRS along with quarterly payroll tax reports
  • Unemployment taxes – Paid by the employer without deduction from employees’ wages
  • Self-employment taxes – Covers the Medicare and Social Security taxes for self-employed people and must be paid quarterly together with estimated taxes
  • Excise taxes – Must be paid on certain types of activities or goods
  • Sales taxes – Might be required to collect and remit sales taxes to the state or local government
  • Property taxes – Local and state property taxes for your business property if you own it

5. Know the Filing Deadline

The filing deadline depends on the form you file. S-corporations, partnerships, and LLCs with more than one member that file Forms 1120-S or 1065 have a tax filing deadline of March 15. If this date falls on a weekend or holiday, your return must be filed by the next business day.

If you operate as a single-person LLC or a sole proprietor, you report your business income on Schedule C of your individual tax return. In that case, file Form 1040 and Schedule C by April 15. If it falls on a weekend or holiday, your return must be filed by the following business day.

6. Request an Extension if Necessary

If you can’t file your return on time, ask for an automatic extension. Single-member LLCs and sole proprietors can request an extension on Form 4868. Other business types use Form 7004 to request extensions.

An extension will give you an additional six months to file your return. However, if you owe money, your deadline for paying what you owe doesn’t change. Try to estimate what you owe and pay it by the original deadline so that you won’t be assessed penalties and interest.

Find an Accountant for My Small Business

While this tax preparation checklist can help you prepare for filing your taxes, working with an experienced accounting professional at TMD Accounting can make the tax process much more manageable. Contact us today to request a consultation at 1-856-228-2205.

Is Your Small Business a Bookkeeping Disaster?

Bookkeeping

Managing bookkeeping can take a lot of work for many small business owners. Balancing your responsibilities to the clients, employees, and suppliers is vital to your role as a small business owner. Sometimes, bookkeeping is the last item on your to-do list. Neglecting your bookkeeping can mean a disaster for your business. If you need help to keep ahead of these tasks, it could be time to contact a professional service to manage your books. Without help, your bookkeeping system could be heading for a disaster.

How Do Bookkeeping Practices Go Wrong?

If you open up your books and get a headache, it might be time to ask for professional assistance. Neglected bookkeeping is one way small businesses can find themselves in a disastrous situation. There are many reasons why bookkeeping gets put to the wayside. When a company does not have the resources or time to keep track of its books, it leads to inaccuracies in the financial records. Some bills are not paid, or transactions need to be entered. With that, you will have a mess on your hands. It can be a challenge to manage the books. When you ignore the problem, it can lead to bigger issues for your business, including putting a strain on your financial outlook.

Signs of Bookkeeping Problems

Many bookkeeping failures are avoidable. If you are not paying attention to your finances and bookkeeping, there could be a potential problem on your hands, and you might not even know it. Some red flags signify issues with your bookkeeping.

Unable To Get Bank Funding

It is a big red flag when you cannot secure bank funding. You might not have the right data to satisfy the bank’s requirements. Banks want well-maintained books to approve any loan. Proper bookkeeping lets you know how money is moving throughout your business. A well-maintained bookkeeping system will help you understand the financial status of your business. With that, you can prevent surprises when applying for additional funding.

Not Compliant With Loan Terms

If your business has borrowed a loan, it usually comes with a few stipulations. These loans often have loan covenants. There are three types of them: affirmative, negative, and financial. With an affirmative covenant, you may be required to submit financial statements or carry insurance. A negative covenant could limit specific actions without approval, such as taking additional debt or selling assets. Finally, you may be required to maintain certain standards with a financial covenant. If you violate these covenants, it could lead to a seizing of assets or calling in the loan. Proper bookkeeping will ensure you are never put in that position with a lender.

Lack of Monthly Closing Procedures

All small businesses should have clear monthly closing procedures. When the books are a mess, it could lead to missing out on something important. If you miss a bill or make a mistake in payroll, it may lead to a snowball effect of errors. One small issue can cause problems that will be difficult to correct in the future.

Unable To Complete Monthly Statements

Monthly financial statements are vital to the success of any business. If the books are not updated, you will not have access to any current data, leading to poor business decisions. You need up-to-date information to help grow your business. Monthly statements are the best way to understand the health of your business.

How Can You Fix Bookkeeping Problems?

First, you may feel overwhelmed with the bookkeeping duties. In those cases, you should use small business accounting services to help manage your financial books. Take a look at other tips to help better organize any book.

Maintain and Organize Receipts

Not maintaining invoices and receipts can cause problems for many business owners. Some businesses do not have the time to keep these books in order. When you have professional services on your side, they can make sure that everything is tracked and organized. Whenever you get an invoice or receipt, you need to account for it. Allowing the receipts and invoices to become disorganized could lead to money management problems in the future.

Separate Personal and Business Expenses

When business owners keep their personal and business expenses together, it can lead to many problems. It can be easy to place the wrong credit in a personal account. However, mixing these accounts can lead to significant bookkeeping problems. Trying to figure out the problem will be a time-consuming process. You can avoid all those issues by separating your personal finances from business ones. When you have a bookkeeper, they will double-check to ensure all the credits and expenses are placed in the proper accounts.

Perform Bookkeeping on a Daily Basis

Many books turn into disasters because it can be easy to forget to update the records. Business owners often focus on other duties, pushing bookkeeping to the side. A professional accounting and bookkeeping service can help you manage your books without taking time away from your business.

Find a Qualified Bookkeeping Service for Your Business

If you want to ensure you have well-maintained books, you need to hire a professional bookkeeping or accounting service. At TMD Accounting, we have over 40 years of experience helping small businesses throughout Gloucester County. We are a family-owned and -operated business that is an affordable, reliable, and flexible choice for your company. Whether you have a disaster-in-waiting or need a new bookkeeping system, we are here to help you. Schedule your consultation by calling 856-228-2205.

How Tax Changes for 2022 Are Affecting Your Small Business

Small Business

During the 2022 tax year, small businesses did not face major changes in tax laws. However, there are several things small business owners should understand when it is time to file their business tax returns for the year. One thing that is critical for small businesses is to ensure they always make their estimated tax payments on time each quarter and understand their tax liability. Here are some of the tax laws small businesses need to understand for the 2022 tax year and how they might affect their tax returns when it is time to file from TMD Accounting.

Small Business Tax Deduction

Partnerships, sole proprietorships, LLCs, and S-corporations are all pass-through entities that can benefit from the small business tax deduction. For the tax year 2022, the owners of small pass-through companies can claim a deduction of up to 20% on their portions of the income earned by their business up to $182,500 for single filers or $364,200 for joint filers. If the business’s qualified income exceeds the threshold, limitations will be applied. However, companies with significant capital expenditures and those that employ a lot of employees might still be able to benefit from the small business tax deduction.

Standard Tax Deduction

Small business owners that do not itemize their expenses can claim the standard deduction on their returns. in 2022, the standard deduction for individual filers is $12,950. Joint filers can claim a standard deduction of $25,900.

Estate Tax

Small business owners might benefit from the estate tax exemption, which is $12.06 million for individual filers and $24.12 million for those who file jointly in 2022. The increased estate tax exemption offers protection to a greater number of small business owners who have accumulated substantial assets and want to avoid potential tax issues when they pass away and leave their estates to their families.

Deduction for Expensing Equipment

Small business owners can immediately deduct the costs of purchasing business equipment up to a maximum deduction of $1.08 million in 2022. The spending cap for equipment purchases in 2022 is $2.7 million under Section 179. This tax relief is permanent.

Certain assets that depreciate over time might be eligible for bonus expensing in 2022. This involves expensing the entire purchase cost at once instead of only a fraction of the cost per year. The ability to benefit from bonus expensing will be phased out in 2024.

Tax Credit for Paid Family and Medical Leave

Under the Tax Cuts and Jobs Act, businesses that provide paid family and medical leave as a benefit for their employees can claim a tax credit. Under the Consolidated Appropriations Act of 2022, the credit was extended through 2025.

Deferred Social Security Taxes Due

In 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This law allowed employers to defer the employer portion of their Social Security taxes due between March 27, 2020, and Dec. 31, 2020. Businesses that benefited from these deferments had to pay one-half of the deferred amounts no later than Dec. 31, 2021. Those businesses also must pay the remaining one-half of the deferred amounts no later than Dec. 31, 2022. If you don’t pay the deferred amounts on time, your business will face assessed penalties on the total amount of the deferred taxes.

What to Do

As a small business owner, you likely have learned that tax preparation for small businesses is a year-round process. This makes it important for you to regularly meet with your accountant and bookkeeper and provide them with accurate financial records each month. Doing so allows your small business accounting services provider to develop a good tax strategy for your business and avoid potentially negative surprises.

Make Sure to Keep Your Tax Records for the Right Amount of Time

Make sure that you understand the tax return retention requirements in your state. While most states require businesses to keep their records for seven years, some businesses retain their records for longer periods in case they are audited. Talk to your accounting professional to learn about your tax retention requirements in the jurisdiction in which your business operates.

Have a Separate Account for Taxes

If your business is new and isn’t earning much revenue yet, you might not think you need to open a separate account for taxes. However, having a separate account for business taxes can help your tax filing process to be simpler and establish good tax habits that can protect your business’s future health.

On average, around 30% of your profits will go to taxes of some type. Open a separate account for your taxes. When you complete your account reconciliations and learn your profit amounts, move 30% of that amount to your tax account. Setting aside 30% of your monthly profits in a tax account can help your business avoid huge tax bills when it’s time to file your tax return.

Find an Accountant for My Small Business

Small businesses should keep in mind how tax laws affect them year-round. Planning for taxes can help to minimize how much you might have to pay. Working with an experienced accounting professional at TMD Accounting can help you develop a sound tax planning strategy to reduce your taxes and ensure you comply with all of the laws that apply to your business. To learn more, contact us today to schedule an appointment at 1-856-228-2205.

How to Prepare for a Small Business Audit

Small Business

You open your mailbox to find a letter with a return address from the IRS. You open it to find that your small business is being audited and your heart sinks. No one wants to have their finances reviewed by the Internal Revenue Service, a prospect that is nerve-wracking, stressful and complicated. Small business accounting services say that getting a letter from the IRS does not have to mean fear and stress, however.

If you have prepared properly and documented your business expenses thoroughly, the fear of the audit may be more stressful than the audit itself. Use these tips to guide you through an IRS audit in order to make the process as painless as possible.

Understanding How Companies are Chosen for Audit

The first step in reducing the stress of an IRS audit is to understand what led to your business being chosen for one in the first place. Most small business owners have no idea why they were chosen and that is an indication that they likely have done nothing wrong. If the first things that comes to mind is “the accountant for my small business must have made a mistake,” you are likely correct. Most audits are due to minor errors that were picked up when tax returns are reviewed. There are some common red flags the IRS looks for when reviewing tax forms as well.

If you operate a business that is cash-intensive, like a café, the IRS may take a closer look. Deductions that seem excessive, such as for meals or entertainment as well as claiming 100 percent use of a company vehicle could trigger an audit.

Other triggers include:

  • Inflated salaries to employees who are also owners or stockholders
  • Reimbursed business expenses that are excessive
  • Paying or filing taxes late in multiple years
  • Very large charitable contributions

Even if those expenses are legitimate, they trigger a review by the IRS which is why small business accounting services suggest you change your operations, so these items are not part of your annual tax filing.

Keep Good Track of Your Finances

One question to ask yourself is “would the accountant for my small business be able to understand this expense?” If the answer to that is no, you may not be keeping good track of your finances. You should follow approved accounting practices throughout the year which will make it less likely your company will be audited. You need to review your financial accounts regularly in order to look for possible errors. Keep accurate records all year long, so you are not scrambling on December 31 to organize things for your small business accounting services. They are likely not going to be excited about a shoebox full of unsorted receipts. If your financial documents are organized and in order, even if you are audited, you will be able to provide details to the IRS.

Anticipate What Will Be Asked

An IRS auditor is likely not interested in seeing your entire financial picture. They are usually looking for particular information due to something that caught their eye in a review. Take the time to go over your financial details before the audit to see where they may have questions. If you had higher than normal meal and entertainment expenses one year because you were expanding your customer base, organize those receipts and any notes you may have about what you discussed during the meal. By cooperating and coming forward with a known problem area, the audit process can go much more quickly.

What Paperwork Do You Need?

There are standard documents the IRS will want to see, regardless of why the audit was triggered. They will want to see bank statements, receipts and canceled checks. The IRS will accept electronic versions, but they must include the name and address of who was paid, the date of the payment and the amount paid. If your company keeps formal books, such as ledgers and journals, you will need to turn them over to the IRS as well. Some businesses may be required to provide an appointment book, such as car service or hair salon owners. If one of the issues is higher than normal meals and entertainment, your appointment calendar may help prove the expenses were legitimate. Equipment and vehicle records may be requested along with travel and entertainment documents.

Small Business Accounting Service

The best way to reduce your risk of audit or to successfully prove that your tax returns were accurate is to work with an accounting service like TMD Accounting. One thing to ask is “does the accountant for my small business offer audit services?” If you have an accountant who files your taxes, they should offer audit protection and, if they make the mistake, many will cover any penalties and fees for you. Working with an accountant can not only help you manage the stress of an IRS audit, but they can also reduce the chance that a red flag will appear in an IRS review at all.

If you are in need of a small business accountant, contact TMD Accounting today to see how we can help. You can arrange for a no obligation consultation by calling 1-856-228-2205 or fill out the easy online form to see how our tax experts can help. Find out why our motto is “where numbers matter and people count. With 40 years of experience, you can trust that we will get your company’s financial world in order.

Small Business Tax Planning Strategies

Tax Planning

The end of the year is approaching and that means you will realize that “the accountant for my small business is going to need my tax information soon.” For some small business owners, that can send them into a panic as they realize they have not thought about taxes since they were filed earlier in the year. These tips from TMD Accounting can help you begin to prepare for tax season and help you stay prepared all throughout the year.

Review Your Income

This is the time to review your income over the past year, according to small business accounting services. During the pandemic, you may have seen your company income drop but now that things are getting back to normal, your bottom line may have improved substantially. For some businesses, however, the inflation has kept their profits lower than expected. If you have seen an increase in net revenue this year, now is the time to look for additional tax deductions to lower your tax burden after the first of the year. By the same token, if your income is lower than you expected, you may find yourself eligible for additional deductions you were not eligible to use in the past.

Check Your Business Entity

This is the perfect time to review whether you are using the right business entity, whether you are a sole proprietor, S-Corp, LLC, partnership or C-Corp. Even though you may have had the same entity for years, your income level can have an impact on which option is best for you. If your company is bringing in $50,000 or less, it is likely that you will not want to go through the process of becoming an S- or C-Corp. If this is your current business entity, you may want to talk to a small business accountant to see if it is time to change. If your company has done exceptionally well this year, you are reaching six figures in net revenue, but are still a sole proprietorship or partnership, you may want to ask, “can the accountant for my small business help me change my business entity?”

Review Retirement Plans

If it looks like you will owe a significant amount to the IRS this year, consider reviewing your retirement plans. This is the perfect time to invest in retirement plans such as an SEP IRA or a Solo 401(k), depending on your business. You could even combine a 401(k) with a Cash Balance Pension Plan. Although you will still be writing a check, it is much preferable to write that check to yourself in order to use it in retirement than it is to write it to the IRS. At TMD Accounting, we can help you create a retirement account that will not only prepare you for your golden years, but also reduce your tax burden.

Are You Working from Home More Often?

One of the things that came out of the pandemic was a realization that working from home can be an option for many people, even business owners. If you have moved some of your operations to a home office, you may be eligible for the home office deduction, even if you were not eligible in previous years. The answer to the question “can the accountant for my small business tell me if I can take the home office deduction” is absolutely yes, but there are a few things you need to know. In order to take the deduction, you must meet certain criteria, so talking to your accountant is the best way to determine if this is an option. If you can take the deduction, you could save hundreds if not thousands on your taxes.

Take the Time to Get Organized

December is the time to get all your business finances organized. Pull out the shoebox of receipts and begin organizing them. The best way to do this is to sort them into piles related to your deductions. For instance, create a pile for office supplies, one for meals and entertainment, one for vehicle costs related to business and so on. Even if you use an electronic financial system, organizing your backup documentation can be beneficial should the IRS flag one of your deductions. The best way to do this, however, is to do it all year so that it does not feel so overwhelming at the end of the year.

Consider Deferring or Accelerating Income

Did you do a large project for a client that could be billed in December? Consider delaying the invoice until January which allows you to defer the income, so it is taxable in the next tax year. However, if you believe your tax rate will increase next year due to higher net revenue, you may want to accelerate the income by issuing the invoice as soon as possible and trying to get payment from the client before the year ends. You can do the same with your expenses. If you expect your tax bracket to be higher next year, you may want to delay paying any expenses you can until after January 1. However, if your tax bracket is higher this year than it will be next year, try to pay as many expenses as possible before the end of the year. A small business accounting service can help you understand if accelerating or deferring income and expenses would benefit your tax situation.

If you are in need of an accounting services, we here at TMD Accounting are ready to help you. We have over 40 years’ experience in the tax industry, are family-owned and operated, working under the motto that “numbers matter and people count.” Arrange for a no obligation consultation by calling 1-856-228-2205 or fill out the easy online form today.

Child and Dependent Tax Credit for Married Filing Separately

Tax Planning

There are several reasons why some married couples opt to file taxes as married filing separately. However, this tax filing status can prevent individuals from claiming certain types of tax credits and deductions they might otherwise be entitled to if they filed their taxes jointly. Here is some information to understand about this filing status and its impact on the child tax credit (CTC) and the child and dependent care tax credit (CDCTC) from the accounting professionals at TMD Accounting.

Why Would People Choose to File Taxes as Married Filing Separately?

When couples file tax returns as married filing separately, they can’t claim many credits to which they would otherwise be entitled. Before the passage of the Tax Cuts and Jobs Act (TCJA) in 2018, there was somewhat of a “penalty” for married couples who filed jointly because the standard deduction for joint filers was not twice that of single filers. However, the TCJA changed the tax brackets to make the standard deduction for joint filers double that of single filers, eliminating this so-called penalty.

Even though filing as married filing separately might make some people ineligible for certain tax credits, it might be advantageous for people in the following types of situations:

  • When a spouse has unpaid student loan or tax debt to avoid a refund being seized to pay for it
  • When one spouse believes the other is inflating deductions or otherwise being dishonest on their tax return and does not want to be liable by signing a joint return
  • When one spouse is applying for income-contingent student loan repayment plans
  • When one spouse’s income is substantially lower than the other spouse’s, and the lower-earning spouse does not want to be liable for the higher-earning spouse’s tax bill
  • When one spouse is unwilling or unable to sign a joint tax return
  • When the spouses are planning to separate or divorce
  • When the taxes owed on the separate returns equal the taxes owed on a joint return to avoid liability for each other’s tax bills

If you do have a good reason for choosing the filing status as married filing separately, here’s how that might impact your ability to claim the child tax credit and the child and dependent care tax credit.

Understanding the Child Tax Credit vs. the Child and Dependent Care Tax Credit

The child tax credit (CTC) is a tax credit parents can claim for each qualifying child they have up to age 17. This credit can be used for any type of expense and is provided in recognition of the fact that parents who have children have less disposable income and more expenses than others who make the same levels of income.

By contrast, the child and dependent care tax credit (CDCTC) is a tax credit a parent can claim to offset the cost of the child or dependent care so the parent can work. The CDCTC is available only to parents who have to pay for child care or adult dependent care so that they can work. On the other hand, the CTC is available to parents who have children younger than age 17 regardless of whether they have to pay for care to work.

Effect of Married Filing Separately Filing Status on the Child Tax Credit

The American Rescue Plan Act of 2021 temporarily expanded the child tax credit during that year, increasing the CTC of $2,000 for children younger than age 17 to $3,600 for children under age six and $3,000 for children ages six to 17. Eligible parents also could receive advanced payments of one-half of the child tax credit each month while receiving the remainder when they filed their 2021 income tax returns.

However, the enhanced CTC was allowed to expire at the end of 2021 and has not yet been renewed. While some people believe the expanded child tax credit might be renewed, it hasn’t been thus far. This means that the existing child tax credit of $2,000 for children ages 17 and younger is currently what might be available to tax filers when they file their 2022 returns.

People who file their tax returns as married filing separately can only claim a reduced child tax credit. The amount that someone with this filing status can claim is one-half of the available credit, and only one parent can claim it.

Effect of Married Filing Separately on the Child and Dependent Care Credit

In general, married couples can only claim the child and dependent care credit if they file joint returns. However, there are a couple of exceptions under which one spouse might be able to claim the credit even when their tax filing status is married filing separately.

According to the Internal Revenue Service (IRS), someone who is living apart from their spouse or who is legally separated might still be able to claim the child and dependent care credit. If you are legally separated from your spouse, the IRS does not consider you to be married and allows you to take the CDCTC if you file as head of household instead of married filing separately. To file as head of household, your child must primarily live with you, and you must pay at least 50% of the costs of supporting them during the year. You will also need to pay for care so that you can work.

If you are married and living apart from your spouse, you can claim the

CDCTC if the following criteria apply:

  • You file a separate tax return from your spouse
  • You maintain a separate household for you and the qualifying dependent for more than half of the year.
  • Your spouse does not live with you during the last six months of the tax year.
  • You pay more than 50% of the costs of maintaining your home.
  • You pay for child or dependent care during the year for the qualifying dependent so that you can work.

Get Help from TMD Accounting

Understanding the best filing status to choose for your situation and the potential impact on your available credits is important. To learn more about optimizing your taxes, contact TMD Accounting today at 1-856-228-2205.

Are GoFundMe Donations Tax Deductible?

Tax Planning

Many people and organizations have turned to crowdfunding to raise money for various needs and causes. One of the most popular crowdfunding platforms available is GoFundMe. While many of the entities raising funds on GoFundMe are charitable, some people worry about whether donations they might make via the platform can be deducted from their taxes.

Whether or not donations made on GoFundMe can be deducted from your taxes depends on whether the donee is a qualified 501(c) organization. If the recipient of your donation is a qualified 501(c) organization, then you can claim your donation as a deduction on your tax return. If the recipient is not a 501(c) organization, your donation is considered personal and can’t be deducted. Here is some more information about crowdfunding donations and when they can be deducted from the tax professionals at TMD Accounting.

When Are GoFundMe Donations Tax Deductible?

Originally starting as CreateA Fund in 2008, GoFundMe changed its name in 2010 and is a crowdfunding platform that can be used to raise money for nearly anything. Donations made on the platform are considered to be personal unless they are given to a qualified 501(c) organization.

If you give money to a non-501(c) organization on the site such as an individual who is trying to raise money for any purpose, your donation will be considered to be a gift and not a tax-deductible charitable donation. Even if you make a gift for a charitable purpose, it won’t automatically qualify you for a deduction.

Another thing to watch for is how much money you donate to an individual on GoFundMe. Since these types of gifts are not considered to be charitable by the Internal Revenue Service (IRS), if you give more than the annual exclusion amount for gifts, you might have to report what you gave and file a Form 709. The recipient will not be taxed on the amount they received.

How GoFundMe Works

Individuals, groups, or organizations can all raise funds on the GoFundMe platform. The site distinguishes between types of fundraisers, including standard campaigns and certified charity campaigns. Many organizers of standard campaigns are people who are raising money for any number of reasons and who can deposit any money they raise into their bank accounts.

While many standard campaigns are for worthy causes, the gifts that are made are given to individuals instead of registered charities. Donations to them are generally not tax deductible.

By contrast, certified charity campaigns are established by registered 501(c)(3) organizations. The organizers don’t handle the funds. Instead, the money is sent directly to the charitable organization through the PayPal Giving Fund. This is a fund that was created by GoFundMe to help registered charities receive donations. When you donate GoFundMe to a registered charity, you will receive a receipt from the giving fund so that you can claim a deduction on your tax return.

When GoFundMe Donations Are Tax Deductible

There are two exceptions under which a donation on GoFundMe could be tax deductible. First, if you give money to a qualified 501(c) organization on the platform, your gift will be tax deductible. Second, GoFundMe has established a program called “GoFundMe Causes”. Through this program, qualified organizations are grouped by their causes. You can make a tax-deductible contribution to the cause you choose, and the donation will be sent directly to the group of verified charities grouped by that cause.

Understanding Gift Taxes

The annual gift tax exclusion for 2022 is $16,000. If you give more than this annual amount to non-501(c) organizations, you could be required to file a gift tax return. While there are exceptions for donations given for educational or medical expenses, the exceptions require the funds to be sent directly to the institutions instead of an intermediary. Funds given on GoFundMe rarely are sent directly to institutions through standard campaigns.

Deductions for Charitable Giving

When you give money to a nonprofit organization, your donation will normally be deductible. You can deduct up to half of your adjusted gross income for cash donations, but there are limits set at 20% or 30% that might apply. Giving money to registered 501(c) organizations on GoFundMe could be a way to reduce your tax burden, but you will need to make sure to save your receipt. To claim a deduction, you will need to itemize your deductions instead of taking the standard deduction using Schedule A. A charitable deduction might be eligible as long as it is given to one of the following:

  • Nonprofit hospitals and schools
  • Some veterans’ groups
  • Local, state, and federal governments
  • Religious organizations

Donations to the following types of organizations generally cannot be deducted:

  • Political action committees (PACs) or political parties
  • Foreign organizations or governments
  • Individuals
  • For-profit hospitals or schools
  • Labor unions
  • Sports or social clubs
  • Homeowners’ associations (HOAs)
  • Responsibilities of Donees

Gifts are generally not considered to be taxable income. However, organizers should keep records to avoid problems.

If a donee receives donations in exchange for services or goods, the IRS might consider the donations to be taxable business income. Be clear in your campaigns that donors will not receive anything of value in exchange for making donations.

If you raise more than $600, the third-party payment processor will send you and the IRS a Form 1099. While the money you raise should not be considered taxable, you will have the burden to show that it was not income. Report the funds you receive on your tax return and then show a reduction of the same amount while including an explanation.

Talk to TMD Accounting

If you are unsure about whether your donations might qualify for deductions, you should talk to the professionals at TMD Accounting. Call us today at 1-856-228-2205.

Bookkeeping for Independent Contractors: Everything You Need to Know

Bookkeeping

If you work as an independent contractor, the Internal Revenue Service (IRS) classifies you as a business. You will need to perform bookkeeping and pay your business taxes to avoid potential problems. Unlike an employee, you won’t receive a W-2, and the businesses with which you work won’t pay the employer share of your Social Security and Medicare taxes. You will be responsible for paying the self-employment tax. Here’s what you should know about bookkeeping and taxes as an independent contractor from the accounting professionals at TMD Accounting.

Independent Contractors vs. Employees

Independent contractors are not considered to be employees of the businesses for which they work. Employees receive regular wages, have schedules created by their companies, and have taxes withheld from their paychecks. By contrast, independent contractors are paid for the projects on which they perform work, handle their schedules, and handle tax payments on their own.

You will also be responsible for buying private health insurance and will not be eligible for workers’ compensation if you are hurt on the job. Finally, independent contractors also are not protected by major employment laws.

Accounting for Independent Contractors

The first thing you should do is determine which accounting method to use, including the cash-basis or accrual-basis accounting methods. The cash-basis method is simple and simply means that you track your income upon its receipt and your expenses at the time you pay them. The accrual-basis method involves counting your income when you earn it and your expenses at the time they accrue rather than when you receive or pay them. A certified public accountant (CPA) at TMD Accounting can help you choose the method that is best for your independent contracting business.

How Independent Contractors Pay Taxes

As an independent contractor, you will have to pay the self-employment tax, which means you will pay taxes to Medicare and Social Security. The self-employment tax is reported on Schedule SE. Before you complete Schedule SE, you will first need to use Schedule C of Form 1040 to calculate your business’s total income or loss.

If you earn more than $600 while working for one of your clients, your client will send a Form 1099-MISC to you and the IRS. If you do not receive this form, you are still responsible for including the money that you earned. You should have a separate saving account you use to deposit money throughout the year to pay your self-employment tax so that you don’t have a huge tax bill at the end of the tax year. Independent contractors typically also must make quarterly estimated tax payments throughout the year.

Bookkeeping for Independent Contractors

You must conduct proper bookkeeping throughout the year as an independent contractor. Having organized books can also help to ensure that you don’t forget to pay accounts receivable, that you send your invoices on time, and that your bills and expenses are paid on time.

You will need to track all of the money that comes in and that you pay out for business-related expenses. You should have a separate business bank account and keep your personal account separate.

Track all business-related expenses and save receipts, including the following examples:

  • Office lease expenses
  • Business computer, phone, and printer receipts
  • Hours spent per project
  • Jobs you have completed
  • How much you charge per hour for each client
  • Operating expenses
  • Money paid to you
  • Bank transfers
  • Travel expenses
  • Bills for utilities, phone, and internet
  • office supplies
  • Career-related courses, subscriptions, and books
  • Accounting software receipts

Establish your Business Entity

It is a good idea to register your business with the state and choose a legal entity structure under which to operate. You can opt to register as a sole proprietor, but this type of entity will not protect your personal assets from potential liability claims. Many independent contractors instead choose to form limited liability companies (LLCs), which offer liability protection. You should also apply for a federal employer identification number (FEIN) from the IRS even if you don’t have employees.

Once you establish your entity structure and get a FEIN, you can open a business bank account. Make sure to also open a business saving account to save money for your taxes and set aside at least 30% of your income each month. Keep your personal and business accounts separate to avoid potential problems.

Reconcile your accounts at the end of each month to make sure your books and accounts accurately reflect your income and expenses. Accounting software can be helpful, and hiring a professional from a firm that offers small business accounting services can be even more so. Most independent contractors can benefit from hiring a CPA to help during tax time to help prevent potential mistakes. Depending on your business, you might also benefit from having a CPA help throughout the year to provide guidance and support that could help you save money as you grow your business.

Find an Accountant for My Small Business

When you are an independent contractor, you are also a small business owner. Keeping on top of your books and taxes is critical to prevent potential tax problems. Call TMD Accounting today for help with your business accounting at 1-856-228-2205.

5 Important Principles of Modern Accounting

Accounting

Every business needs to have a strong accounting system in place so that they can understand their finances and make accurate projections about the direction of their companies. Accounting involves continuously observing and exercising control over your company’s economic activities. The success of your business will largely depend on your accounting, and it’s important for your company to strictly follow the generally accepted accounting principles (GAAP) in your accounting practices.

As a discipline, accounting is strict and follows the GAAP to prevent inaccurate or incomplete information from being reported. Here is what to know about modern accounting and the five generally accepted accounting principles from the professionals at TMD Accounting.

Principle 1: Revenue Recognition

The revenue recognition principle is the first principle your business should know. When you record data, you need to think about the time during which you recognize revenues your company earns through its income statements. When you will recognize your revenues will depend on whether your company uses the cash-basis or accrual-basis method of accounting. If you are using the cash-basis method, you will recognize your revenues during the period in which your company receives them. If you are using the accrual-basis method, you will recognize your revenues during the period in which you provide services.

The revenue recognition principle states that companies should only recognize revenues when they have mostly or totally completed the process of earnings. This means you should record revenues at the time when the purchaser takes possession or when you have completed your service. The revenue recognition principle helps businesses to keep accurate track of their accounts and prevents them from counting profits too early.

Principle 2: Cost

Businesses should also record their assets at the time they purchase a service or product to accurately track their expenses. YOu should record the cost of anything on which your business spends money and properly account for depreciation. Under the cost principle, businesses should not record the resale cost of items in their books. You should instead use the item’s historical cost. For example, if you own an office, use the historical cost of the property instead of its fair market value while making certain to account for overhead costs.

Principle 3: Matching

Businesses should make sure they match the revenues they have recognized with their expenses during the same period and record them when the expenses were incurred. If your business recognizes revenues for services or products you sold, you should also recognize the cost of those services or products during the same period.

Every expense item should match a revenue item under the matching principle. For example, if you sell t-shirts, you should recognize the revenue of a t-shirt when a customer purchases it while also accounting for the expense involved in your business purchasing the item at its wholesale price. When you apply the matching principle, you are using the accrual-basis method of accounting.

Principle 4: Full Disclosure

When your business creates its financial statements, all of the information must be complete and transparent. You should not include any information that is misleading so that your clients or partners are aware of all relevant information about your company.

Prinicple 5: Objectivity

At all times, your accounting information should remain accurate and free from opinions. You should make sure your accounting data is supported by evidence, including receipts, invoices, and vouchers. When you remain objective, your financial reports will be more reliable. You should steer clear of anything that could call your work into question because of your subjective opinion.

Under the objectivity principle, your books should include verifiable information that is supported by objective evidence and should not include any unsupported data. The values used in your reports should not be subjectively measured even when subjective data is more favorable than the data that can be verified. If you violate this rule, it could lead to confusion because of making it difficult to comprehend the subjective data. It is best to only include data that others can verify in your financial reports.

Why Is It Important for Businesses to Know Accounting Principles?

The five generally accepted accounting principles are justified, and they provide a good foundation for your company’s budgeting and planning processes. By strictly adhering to these five principles, you can avoid conjectures that could lead to financial problems.

Following basic accounting principles can also help to improve the cohesiveness of your organization. Depending on your business’s size, different employees might be in charge of different accounting principles. If you don’t have a plan, it could be impossible for your employees to perform their jobs so that you can get a clear picture of your business’s financial health. If left unchecked, this can result in significant financial problems and potential business failure. Making sure your plan is founded on the five generally accepted accounting principles can help to avoid these types of issues.

The basic principles of accounting provide a straightforward method for reporting your finances. Each principle has a role in the big picture of your company’s financial health. When you establish these principles at your business, you can facilitate a more productive and organized environment to track your cash flow and avoid problems such as unverified data and missing funds.

Find an Accountant for My Small Business

When you work with TMD Accounting, we can help you establish the generally accepted accounting principles at your business to facilitate your company’s growth and success. To learn more, call us today at 1-856-228-2205.

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